A large society which is separated into two halves based on ancient tradition- lets say Red Clan and Blue Clan.Red Clan has "X" beliefs, whereas Blue Clan has "Y" beliefs... They are similar beliefs, but in each case, the Red Clan maintains certain folktales which are heretical and historically incorrect to the Blue Clan, and vise versa.The two clans begin to argue about which folktales are the true history of their people, each clan denounces the other as heretics and betrayers of the heritage of their people, war begins.

Some society, let's say the elves, went away to war. One of the lesser nobles' sons at the front wrote a letter a day to his wife/sister back home detailing the fantastic events of each day, each battle. She told them as stories, folktales, to the people (or put on nightly plays that re-enacted his stories). Centuries later, his letters became the recorded saga of the war.

The war of Folktales could be a Fey War. These chaos creatures/ sprites/ fairies make the dreams of mankind come true. For some reasons that is vague, they unleash the creatures of folktales against the people. Thus armies fight the armies of wicked wolves, mad huntsmen, and so on.

-Folk-heroes battling each other-Your basic cliche war of gods-A war between various spirits-The soldiers in the war believe that various folktale heroes and beings fight on their side, and speak accordingly

A room full of old men with bad knees and stringed instruments picking out notes while telling the best stories that they know, ranging from epics that are known down to the youngest toddler, to lost and forgotten songs and tales that were prised from the cold hands of the dead, or the steely embrace of the earth. Ala a battle of the bands.

How about a highlander-type battle, where people in the 'modern' world come to believe they are the incarnations of folk-heros or monsters and even gain the powers attributed to said heroes. So, essentially, you've got all these individuals who, on one level, are simply delusional and super-powered, but on another are tapping the deepest fears and hopes of the people- they could even become rallying points for the oppressed or disadvantaged as their struggle with each other comes to its climax